How Do You Fix SEC Broken Windows? The answer is – you can’t!

Photo: Securities and Exchange Commission by Scott S, CC BY 2.0

The Securities and Exchange Commission (SEC) has recently announced it is discontinuing their enforcement program requiring admissions of wrongdoing and the prosecutorial approach they were supposedly taking after the 2008 financial crisis. Steven Peikin, co-director of the SEC’s enforcement division, said the SEC would drop the “broken windows” strategy of pursuing many cases over even the smallest legal violations, and may also pull back from trying to make some companies admit to wrongdoing as a condition of settling with the SEC.”

What I found ironic and hypocritical was Mr. Peikins’ remark that the SEC “would continue to run a tough enforcement program with the goal of rooting out intentional wrongdoing”… “I think when people resolve cases with the commission [and] neither admit nor deny but agree to all the points of relief, I don’t think most people in the world say, ‘Boy, they really got away with that.’”

He is so far off track. People really do say ”Boy, they got away with that.” As the Wall Street Journal article points out, “many have criticized the SEC’s practice of settling cases without fault admissions, including U.S. District Court Judge Jed Rakoff, who said it made enforcement cases look like “pocket change” and a “cost of doing business” for Wall Street.

I’ve talked about Ms. Whites’ abysmal record on several occasions as have many others. The facts bear it out. According to research by David Rosenfeld, a professor at the Northern Illinois University college of Law, during Ms. White’s leadership only about 2% of the 2,063 cases filed from 2014 to 2017 involved admissions. His research points out that makes for 22 entities admitting fault in the most egregious fraud cases. I may be missing something, but 22 entities in 3 years, that’s a really tough enforcement program?!

Surely Mr. Peikin did not say “I think we have room for improvement”out loud with a straight face. Room for improvement. Well, that may be a challenge. It appears that the SEC’s budget is frozen. The enforcement division, which in 2016 had 1,400 employees might be cutting 100 investigators from its staff and not bothering to replace them.

As Jerri-Lynn Scofield , who has worked as a securities lawyer and a derivatives trader recently posted, ”no matter how aggressive Peikin might like to be in rooting out corporate wrongdoing, that will be a difficult goal to achieve, with a frozen budget and a shrinking staff. Which is no doubt exactly what our current crop of Congress critters intended.”

And I do believe this, in fact, is what is intended.

Ms. Scofield asks, “Now, I don’t dispute that the SEC intends to dial back its commitment to seeking admissions. Yet I want to raise here: How much of a policy change does this announced shift actually represent?” As she points out, even though they claimed they would be pursuing a tougher enforcement line, post 2013, when it announced a policy change with much fanfare, the SEC did not pursue “bold and unrelenting results.”

As I’ve pointed out before, my concern over the SEC’s performance goes way back. I have my own issues with the SEC, giving them 1,000+ pages of documents evidencing Citi’s behavior in July of 2008, three months before the bank bailouts with Citi then receiving over $350 billion in capital and toxic asset guarantees, not including the FDIC’s commercial paper guarantees and the Federal Reserve’s $2.5 trillion in secret loans.

And remember the SEC has continually refused to release any of the documents in question despite many FOIA requests, with some of the documents being public information. Why? Because my testimony and documents definitively shows that the government knew about Citi’s fraud before the bailout and bailed them out anyway.

Yet my concerns with the SEC are even deeper than my personal issues. The continuing revolving door that exists in DC with, as Ms. Scofield puts it, “our Congressional critters“ and regulators is a troublesome one. As I’ve commented before, Mary Jo White, whose work as chair of the Securities and Exchange Commission under former President Obama was a bitter disappointment to those who hoped she would actually enforce banking laws.Her rejoining the corporate defense team at Debevoise & Plimpton, marked her sixth trip through the revolving door between various government jobs and her former law firm. The law firm represents many major financial institutions under federal investigation, and Ms. White will be assisting these clients to “manage their legal exposure.”

Her replacement was Walter J. (Jay) Clayton, a law partner at Sullivan & Cromwell who worked extensively with Goldman Sachs and has stated he wants to promote growth by scaling back regulations. Mr. Clayton had also represented eight of the ten largest Wall Street banks within the last three-plus years in several IPO transactions. I noted previously, these are the very same banks “that are serially charged by the SEC for increasingly creative means of fleecing the public.”

What we need to be really concerned about is that the rescinding of the “broken windows” policy, weak as it was, is perhaps for a very specific reason. The revolving door which exists in government and on Wall Street is concerning. Wall Street goes on to serve in government; in the Department of Justice, the Treasury, the Securities and Exchange Commission (SEC), and on and on.

They serve in a government position knowing that their real reward is coming full circle – they come back home to Wall Street or serving Wall Street via the law firms which pander to them and reap huge financial rewards. Well, if you’re coming back to play on Wall Street you sure don’t want to alienate your banking buddies thereby prosecuting them for fraud and intentional wrongdoing. Heaven forbid you would hold them accountable!

Of course, they don’t want to be tough. Of course, there is scaling back. And the SEC rescinding the “broken windows” policy is, I believe, just the tip of the iceberg.

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Richard Bowen is widely known as the Citigroup whistleblower. As Business Chief Underwriter for Citigroup during the housing bubble financial crisis meltdown, he repeatedly warned Citi executive management and the board about fraudulent behavior within the organization. The company certified poor mortgages as quality mortgages and sold them to Fannie Mae, Freddie Mac and other investors.

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